Among the decacorns Salesforce, Slack, and Shopify the common denominator is that they successfully migrated from being a product to a platform company. Most iconic technology companies of our times began as product companies and evolved into platforms.
Product or Platform?
Sometimes there can be a little confusion while differentiating a product from a platform; let us settle this by negation. It is not a platform if:
- If it is easily replaceable with another product
- If other businesses can’t generate revenue by building on it
- If it’s part of an existing product
Slack a platform as it allows integrations with numerous services, and many products are built using it.
Digital Platforms: The Wormholes of Growth
The most spectacular growth stories of resilient growth are those of digital platforms. The reason is simple: products produce a single revenue stream, while platforms facilitate direct interaction among diverse users, as well as vendors, and create many more opportunities for creating revenue. Typically, there is a much more complex exchange of value between vendor and consumer.
Take examples: Salesforce’s core CRM evolved into a broader platform for enterprise applications, proving instrumental in it becoming the first SaaS decacorn.
Likewise, Amazon’s AI Echo speakers gained incredible smartness with the company’s decision to make Alexa and its Skills Kit available to third-party developers thus, creating a platform that would run on millions of devices performing voice interaction.
The Great Migration — From Product to Platform
Digital Platforms allow the complex creation of value and innovation. Here are a few compelling arguments that will encourage you to take the first step:
- Co-creation of Value: A successful platform allows vendors and partners to build on the platform, working hand-in-hand to create value. For instance, the persistent success of Microsoft is driven by its constant updates that engage consumers, and also by the fact that third-party developers build thousands of applications on the Windows platform to provide additional value.
We hope you have enjoyed the article so far. Please access the full blog for detailed and complete insights on the topic.
The Platform Value
The hard to replicate advantages a platform must capture are:
- Platforms harness a multiplier effect that leverages and benefits dozens, hundreds or even thousands of partners. The platform company itself gives up some control, but in return becomes much more valuable to its customers and partners. Third-parties likewise gain access to data, functionality and/or distribution channels, accelerating their businesses.
- Proprietary and unique data: Do you have access to proprietary data that other developers need or benefit from? CRM data in Salesforce, order and customer history in Shopify, and identity information in Facebook are all examples of valuable and unique data.
- Distribution channel: Do you have a large and/or high-value, hard-to-reach audience that regularly uses your app or workflow? Sales reps live in Salesforce, account and customer success managers live in Gainsight, your team is on Slack — these are all users (and their workflows) that are valuable for third-party developers to hook into.
- Essential functionality: What feature or function do you provide uniquely well, or make dramatically easier to set up and maintain? The research dollars and data that Amazon can invest in Alexa dwarfs the resources of almost all other companies, hence why thousands of startups (and many hardware OEMs) are embedding Alexa rather than recreating their own voice AI. Similarly, relying on mParticle, Tealium and Segment to manage third-party integrations has proven far simpler for companies than trying to replicate the same platform internally.
- Platform strategy
To the extent that you have some of these assets, there are at least four key dynamics that should guide your business and product road map:
- Open vs. curated: In the old days, if you wanted to distribute a mobile application, you would have to cut a preload deal directly with a carrier like AT&T or Verizon. Google removed that friction with an open Play Store, where your app can be available for download as long as you abide by the platform rules. In the enterprise, Salesforce has an open platform and published APIs, while integrations to SAP are more controlled. One approach isn’t necessarily better. Open platforms reduce friction and facilitate more selection for end users, while curated platforms actively manage risks to your data and customer experience.
- Paid vs. free: There are different ways to monetize platforms. The Apple, Google and Shopify app stores monetize on a direct percentage of each transaction or subscription. Other platforms like Slack view a robust third-party extension ecosystem as driving incremental customers and stickier retention.
- Scale effects: When thinking about the prior question, one consideration is whether adding more users dramatically improves the unit economics of your business. You might price your platform fees, and make other decisions, differently if you believe so (or do not believe so). Jeff Bezos and the team at Amazon builds their operating models based on what they think their scale economies will be. Hence, they can offer disruptively priced platforms like Amazon Web Services, but also eventually reach profitability with scale.
- Network effects: How will platform adoption by additional users and developers deliver more value to all existing participants? DocuSign is a great example of a networked business — as more people find it easier to adopt and integrate DocuSign into their workflows, everyone in the network benefits (less paper for all!), including all the app companies like Microsoft and Salesforce that have embedded DocuSign as their electronic signature offering.
Executives and partnership managers need to determine what data is made available and how third parties provide value back to the platform, as well as what functionality is “core” (i.e. led by the platform company) versus “white space” where partners will lead. Sales and marketing teams need to implement plans for partner recruitment, platform certification, training programs and joint value propositions to engage existing and future customers.
Bottom line
It’s no coincidence that many of the largest technology companies in the world are platform businesses — they are orders of magnitude more valuable and durable. Building a platform company requires a dominant application as the starting point, but making the leap has a range of strategy, technology and go-to-market implications. Increasingly, the best application companies will recognize larger platform opportunities and pursue them aggressively.
